Monday, December 6, 2021

The level and distribution of income in Ireland in the 2020 SILC

Eurostat have 2020 figures for Ireland to the EU-SILC, the EU’s Statistics on Income and Living Conditions.  Ireland is one of the last countries to have provided figures to Eurostat and the national version won’t be published by the CSO for another few weeks.

Those figures won’t be much different to what is now available on Eurostat but will come with much more detailed background notes.  One such item to be explained is that all the 2020 figures Eurostat have for Ireland are marked with a “b” – for series break.  It is not yet clear what this is. It could be that was a change during 2020 with in-person interviews shelved as COVID hit.

And at the outset it is probably worth noting that although this is the 2020 SILC, the year represents when the data was collected rather than the period for which it applies to.  The CSO carry out the survey across the full year, and respondents are asked for details of their income in the 12 months prior to the survey.

Thus, if someone was interviewed in January 2020 for the 2020 SILC, the reference period for their income would almost wholly encompass 2019.  This would move one month forward for people interviewed in February and so on.  Indeed, when this data goes through the OECD’s methodology it will be assigned to 2019 when published on the OECD’s income inequality database.

Another difference worth noting is the equivalent scale used to compare households of different sizes.  The CSO apply a national equivalence scale with applies a weight of 1.00 to the first adult, 0.66 to all subsequent adults and 0.33 to all children under 14.  These are added together with the household’s income divided by the result to get income in terms of equivalent people.

Eurostat uses the OECD-modified scale which gives a weight of 1.00 to the first adult, but 0.5 to all subsequent adults and 0.3 to all children under 14.

This means that a household of 2 adults and 2 young children would have an equivalising factor of 2.32 with the CSO’s approach and a factor of 2.1 with Eurostat’s approach.  This changes the level of equivalised income within each dataset but should not have a hugely significant impact on growth rates or other relative comparisons.  So, the figures the CSO itself publishes in a few weeks could be slightly different but the overall trends will be the same.

The Level of Income

We will start with median equivalised income in nominal terms.

SILC Eurostat Median Nominal Equivalised Disposable Income 2004-2020

In and of itself the actual level is not that informative.  Eurostat’s figure for 2020 is €26,250 but income per equivalent person is not a concept we can readily relate to.  What matters are the growth rate and relative differences, both within the income distribution in Ireland and with other countries.

SILC Eurostat Growth in Median Nominal Equivalised Disposable Income 2005-2020

Eurostat’s figures show that for the SILC data collected in 2020, the change in median equivalised income was +2.8 per cent.  That matches the average nominal growth rate of the previous 15 years though the significant volatility in the outcomes that gave rise to that average is evident from the chart.

Relative to the rest of the EU15, Ireland had the fourth-highest median equivalised disposable income  - in nominal terms.  While some exchange rate conversions are made no adjustment is made for different price levels in the below chart.

EU15 SILC Median Income 2020

The Distribution of Income

Three of the commonly used inequality measures that are applied to the SILC data are the gini coefficient, the quintile share ratio and the at-risk-of-poverty rate.  Here is the gini coefficient fir Ireland since 2004 with a higher figure representing higher inequality.

SILC Eurostat Gini Coefficient 2004-2020

Ireland’s estimated gini co-efficient has been trending downward over the last few decades – but it should be noted that the changes are exaggerated by the truncated vertical axis used in the above chart.  The changes are small.  The Eurostat figure for the 2020 SILC is not significantly different from what it was the previous year, going from 0.283 to 0.287.

EU15 SILC Gini Coefficient 2020

Within the EU15, Ireland’s gini coefficient for disposable income is in the middle of the pack.  Ireland stands out more for the change in the gini coefficient over the last 15 years.  This following chart shows how the average for each country from 2018 to 2020 differs from its average for 2004 to 2006. 

EU15 SILC Gini Coefficient Change 2005 to 2020

For most of the EU15, the gini was either unchanged or increasing over the period.  For those countries showing a reduction in their gini coefficient the fall in Ireland was the second largest, with only Portugal showing a larger fall.

The gini coefficient is a useful indicator but as an measure which condenses a population-wide distribution of income into a single number looking at other measures can also be useful.  The quintile share ratio compares the income share of the top 20 per cent of the income distribution to the income share of the bottom 20 per cent.

SILC CSO Income Quintile Share 2004-2020

The pattern here corresponds to what is shown by the gini coefficient.  Over the last 15 years, Ireland’s quintile share ratio has fallen from around five in the mid-2000s to around four now.  This indicates that incomes at the bottom of the income distribution have grown faster than those at the top.

Ireland’s quintile share ratio is the sixth lowest in the EU15.

EU15 SILC Quintile Share Ratio 2020

The at-risk-of-poverty rate focuses in the lower end of the income distribution and looks at how many people live in households with an equivalised income that is less than 60 per cent of the national median. 

With Eurostat putting Ireland’s median equivalised income at €26,250 in 2020, this gives an at-risk-of-poverty threshold of €15,750 for a single-person household.  If we multiple this by 2.1 we get the threshold for a 2 adult plus 2 young children household: €33,075.

Here is the share of people in Ireland who live in households with an equivalised income below the 60 per cent threshold.

SILC Eurostat At Risk of Poverty Rate 2004-2020

This shows a similar pattern to the quintile share ratio and Ireland’s position in the EU15 is also the same (sixth lowest).

EU15 SILC AROP 2020

As it is a measure of inequality, the at-risk-of-poverty rate is not always a good indicator of changes in living standards at the lower end of the income distribution.  The post-2008 period in Ireland is a good illustration of this.  We know that there were very significant falls in income but this is not reflected in any noticeable increase in the at-risk-of-poverty rate in the period from 2009 to 2012.

This is because the at-risk-of-poverty rate is a relative measure.  As incomes in the economy fell, the threshold for been assessed as at-risk-of-poverty also fell.  One way to get an insight into absolute changes in living standards is to use a fixed threshold (with changes only made for inflation rather than the general trend of income in the economy).  Eurostat provide an anchored at-risk-of-poverty rate with the 2005 threshold as the anchor.

SILC Eurostat Anchored AROP Rate 2005-2020

The at-risk-of-poverty rate was 20 per cent in 2005.  In the chart above, the 2005 threshold is rolled forward (adjusted for inflation) and the share of the population below that threshold is reported.  It is the changes rather than the levels that are informative here.  We can see that this anchored at-risk-of-poverty measure rose significantly after 2008.  It had been falling consistently since 2014, but was unchanged in 2020.

There’s much more to the SILC than income figures but that’s probably enough for now.

Tuesday, November 30, 2021

A possible explainer for Google’s recent tax settlement?

The 2020 accounts for Google Ireland Limited were published last week and showed that the company had a €218 million tax charge that arose from “the resolution of certain tax matters relating to prior years” (and there was a further €127 million of associated interest).  The group’s parent company, Alphabet Inc., had stated in its own 2020 annual report that its “tax years 2011 through 2019 remain subject to examination by the appropriate governmental agencies for Irish tax purposes.”

It’s possible we can get some insight into the nature of this issue from the table of the annual profit and loss statements which were summarised in the previous post which looked at Google’s footprint in Ireland since 2003.  Here is the relevant table. Click to enlarge.

Google Ireland Limited Income Statements 2003-2020

In particular we are drawn to the column for operating profit, which forms the bulk of the company’s profit before tax.  It looks like Google Ireland Limited’s operating profit can be broken down into three time periods:

  • 2003-2011
  • 2012-2015
  • 2016-

A post a number of years ago looked at the determination of Google’s profit in Ireland and looked at the period 2012 to 2014 which ties in with the middle time period above.  As the table shows, in 2012 there was a significant step-up in Google Ireland Limited’s operating profit compared to the previous decade – or at least an increase above that which could be explained by the expansion of the company.

The earlier post reached the conclusion that “Google Ireland’s operating profit has been around 6 per cent of its expenses excluding the license [or royalty] payment.”  Prior to 2012, it seems that the cost-plus arrangement for determining Google Ireland Limited’s operating profit only included the costs incurred in Ireland.  It seems likely that the step-up in 2012 was due to the inclusion of the costs Google Ireland Limited incurs in the payments it makes for the sales and marketing efforts to the local Google subsidiaries in the markets in which it sells.  The earlier post sets this out for a sample of countries. 

The earlier post should have been updated because in 2016 there was another step up in Google Ireland Limited’s operating profit.  It looks like the profit margin is still in the region of six to seven per cent of expenses but it now includes all expenses, most notably the royalty payment.

Here is Google Ireland Limited’s operating profit as a per cent of its administrative expenses since 2005.

Google Ireland Limited Operating Margin 2005-2020_thumb

The step-ups in 2012 and particularly 2016 are clear.  The outcome for the period 2012 to 2015 would be around 6.5 per cent if the royalty payment is excluded from the base, which is pretty much what it has averaged in the period since 2016 with the royalty payment included.

It is only supposition, but it is possible that the tax issue that Google Ireland Limited revealed in its accounts related to the exclusion of the royalty payment from the base for determining its operating profit using a cost-plus margin in the years before 2016.  The fact that there was €127 million of interest linked to the €217 million tax charges lends credence to the conclusion that it relates to tax due a number of years ago (with Revenue applying an rate of eight per cent per annum to such amounts).   

It is possible that Revenue began this review back in 2015 or 2016 with Google then deciding to include the royalty payments in the base for the cost-plus determination from then on.  Thus what was in dispute was the operating profit figures for Google Ireland Limited for years prior to 2016.  Of course, the change in 2016 also coincides with the time when the cage-rattling by the European Commission using state-aid cases into tax was going strong and that may have influenced the company’s decisions.

So, can we get numbers to fit the hypothesis that the tax settlement is linked to the inclusion of royalties in the case for the cost-plus assessment of Google Ireland Limited’s profit? Perhaps we can.

Looking at the amount of royalties paid, figures for which are available in the accounts of a subsidiary in The Netherlands, Google Netherlands Holding’s BV, shows that these came to €29.7 billion from 2013 to 2015.  While we don’t know the cost-plus margin applied, using 6.5 per cent gives a return of €1.8 billion.  The following table shows what happens if these returns are taxed at 12.5 per cent and the interest that would have accrued if the tax should have been paid seven, six and five years ago.

Goolge Ireland Holdings Tax Settlement

Maybe it is little more than coincidence that the figures from this scenario are close to “adjustment for corporation tax of prior periods” that Google Ireland Limited disclosed in its 2020 accounts.  These were an additional tax charge of €218.2 million and €127.3 million of related interest.  In fact, the figures are more than just close; they are almost identical.

One fly in the ointment is that the above table only includes the years 2013 to 2015, whereas the note in Alphabet’s 10k said that all years back to 2011 were under review.  But years being under review does not mean there will be a revised tax assessment for them.

We do know there has been a change since 2016 and it is possible that the move to include the royalty expense in the cost-plus calculation has added around €700 million to Google Ireland Limited’s Irish tax bill in the five years since.  The first table above shows a step-up in Google Ireland Limited’s tax charge in 2016. If this change to the cost-plus methodology hadn’t been implemented, and Revenue’s assessment held up, then Google could have been announcing a €1 billion tax settlement last week – assuming the hypothesis here is correct. 

So, as has often been the case the issue was not the tax rate applied to profits but the amount of profit to be subject to Ireland’s 12.5 per cent rate.  The suggestion here is that, up to 2016, the royalty paid by Google’s Irish subsidiary for the right to sell advertising using Google’s platform and technology was excluded from the cost-plus assessment used to calculate its taxable profit in Ireland. 

The Revenue position looks to have been that while the change in 2016 was fine it should also have applied to a number of earlier years leading to an increased tax charge for those years.  Is this a guess? Yes. But probably not a bad one.

Monday, November 29, 2021

Google’s footprint in Ireland since 2003

Google set up its EMEA headquarters in Dublin in 2003, a year before its IPO.  Initially it was a modest operation and during 2003 the average headcount was 21. By the 2020 annual report of Google Ireland Limited this had increased to 4,314.

Google Ireland Limited Headcount 2003-2020

The accounts also give the staff costs incurred.  These have increased from €0.7 million to just over €750 million in 2020.  All told, Google Ireland Limited has had €4.8 billion of staff costs since it was established in 2003, with almost three-quarters of that being wages and salaries.  For its most recent year, 2020, the average of wages and salaries per person employed was €120,000

Google Ireland Limited Staff Costs 2003-2020

The column for “social welfare” is almost certainly employer’s PRSI and the company has paid €360 million of this over the past 18 years.  The company has also made €121 million of payments into its defined contribution pension plan where “the company matches the employee’s contributions up to a maximum a seven per cent.”

We now turn briefly to the financial outturns for Google Ireland Limited with the numbers and the table getting a bit bigger.  Click to enlarge.

Google Ireland Limited Income Statements 2003-2020

Turnover has grown from just €7.5 million in 2003 to €48.4 billion in 2020.  In cumulative terms, the company has had more the €300 billion of turnover but more than half of that was in the last four years.

The company has had a cumulative pre-tax profit of €10.2 billion and incurred a tax charge of €1.7 billion.  Of this €0.1 billion was for foreign withholding taxes leaving a charge to Irish Corporation Tax of €1.6 billion.  That gives a charge to Irish tax of 15.8 per cent of profit before tax.  This is higher than the standard 12.5 per cent that applied during the period for two reasons.

First, the company incurred expenditure that was not allowable as a deduction for tax purposes meaning its taxable income was larger than the profit reported in the accounts. Second, the company had some non-operating income, such as income received, and this is taxed at the 25 per cent of Corporation Tax for non-trading income.

There does appear to be a couple of noticeable step-changes in the accounts for Google Ireland Limited, most noticeably for operating profit.  Could these be linked to the recent tax settlement that was revealed last week.  Perhaps.  And we will look at that in a subsequent post.

Thursday, November 25, 2021

What impact did the end of the ‘double irish’ have on Google Ireland Limited? None

Google ended its use of the high-profile ‘double-irish’ tax structure in 2019.  We have been tracking the impact of the revised structure in Ireland’s balance of payments data and in the consolidated accounts of Alphabet, the name of Google’s parent company.  A detailed examination of these changes is provided in this technical paper.

The financial accounts for Google’s subsidiary in Ireland, Google Ireland Limited, are now available and this allows us to see the impact the ending of the ‘double irish’ had on Google in Ireland.

Google Ireland Limited 2020 Accounts

And we can see that it had no impact.  The outcomes in 2020 are pretty much inline with the outcomes in 2019.  Turnover rose to reach €48.4 billion with a reduction in the cost of sales leading to a gross profit of €36.4 billion.

The main cost of sales for the company are payments to third-parties with websites on which Google’s advertising is displayed.  These increased in 2020.  The reason for the reduction in cost of sales was “a reduction in certain operating fees paid to fellow group undertakings.”

From gross profit, €33.6 billion of administration expenses are deducted which, after other operating income and expenses, leaves an operating profit of €3.0 billion.  The administration expenses include the operating costs of the company such as €750 million of staff costs and will include other running costs.

However, the main element in this item is the expenses Google Ireland Limited incurs for the right to sell advertising using Google’s platforms and technology. This technology is developed elsewhere and the Irish subsidiary pays for the right to use that technology.  This right is transferred through a licensing agreement and in return for that right Google Ireland Limited pays a royalty fee to the owner of the intellectual property. 

A breakdown with the royalty payment is not provided.  The accounts of a Google subsidiary in The Netherlands, the “dutch sandwich”, show that the royalty payments made by Google Ireland Limited in 2019 were €19.4 billion.  Given the increase in administration expenses shown in the accounts, the royalty payments in 2020 were probably around €22-23 billion.

At the 12.5 per cent of Corporation Tax, the tax on Google Ireland Limited’s €2.85 billion of profit would be €357 million.  The total tax charge for the year was €622 million with the following table setting out the reasons for the difference.

Google Ireland Limited 2020 Tax Recon

In its financial accounts, Google Ireland Limited had around €250 million of expenses which are not deductible for tax purposes.  This increases the tax charge by €32 million relative to what it would be if tax was levied on financial profit rather than taxable income.  The company also incurred withholding taxes, possibly in other jurisdictions, of €15 million.

The largest item is the result of the conclusion of a tax audit which resulted in an additional tax liability of €218 million (with a further €127 million of interest).  In its 2020 annual report, Alphabet Inc. noted that its “tax years 2011 through 2019 remain subject to examination by the appropriate governmental agencies for Irish tax purposes.”  It is likely that the above figures represent the conclusion of this examination and thus are unrelated to the ending of the ‘double-irish’ structure.

The ‘double-irish’ has ended and Google Ireland Limited continues to receive tens of billions in revenue from the sale on online advertising in markets across Europe, the Middle East and Africa (EMEA).  Some of this revenue goes to third-party sites that host the advertising, some goes to cover the staff and running costs of the Dublin office but the main cost of Google Ireland Limited continues to be the royalty expense it incurs for the right to sell advertising using Google’s technology.  None of this has changed with the ending of the ‘double-irish’.

There has been no impact, or additional tax liability, in market countries and there has been no change in how the Irish subsidiary operates.  From our previous analyses we do know that what has changed is where the royalty payments are going to.  Previously they went to Bermuda, via The Netherlands.  The 2020 accounts of the company that was in Bermuda are also now available.

Google Ireland Holding 2020 Accounts

Here there is a change.  The company had a turnover of nil in 2020.  In 2019, the company in Bermuda had a turnover of $26.5 billion comprising the royalties paid out by Google Ireland Limited in Dublin and also by Google Asia Pacific Pte. Limited in Singapore which covers markets in Asia for Google.  After administration expenses of $14.1 billion (the bulk of which was a $10.4 billion contribution to the R&D costs of the group’s US parent) the company in Bermuda had a profit of $13.7 billion.  With no turnover, this was not repeated in 2020.

The reason is that the royalties are now paid to the United States.

Royalty Imports to United States 2012-2021

There is only one thing that has been impacted by the end of the ‘double-irish’. That is in how the company is taxed in the US.  And that is really only a change in the provisions under which the company is taxed (from GILTI to FDII) rather than a dramatic increase in the amount of tax paid by the company.

There has been a decade of headlines about the ‘double-irish’.  The pantomime villain stopped using the structure almost two years ago.  There has been no impact on the taxation of Google in Ireland or on the taxation of Google in the markets where it sells. Doubtful we’ll see a slew of headlines about that though.

Friday, November 19, 2021

Ireland in the Global Income Distribution

Here is a website that has an interactive chart showing the position of a country’s income distribution within the global distribution.  The ventiles (one-twentieths) for each country ranked along the horiontal axis where their position in the world income distribution given on the vertical axis.  The example below shows Ireland.

Ireland in the Global Income Distribution

It shows that most incomes in Ireland are towards the top of the global income distribution (in price-adjusted terms).  Ireland’s first ventile (the bottom 5 per cent) were located at around the 65th percentile of the global income distribution with the second ventile at around the 80th percentile.

As the chart title indicates the estimates, which are based on the work of Branko Milanovic, are based on data that is around ten years old.  There have been significant changes in Ireland since then – the country is no longer facing the teeth of a deep recession – and these have led to large changes at the bottom of the income distribution.

Cut Offs for Lowest Income Percentiles

The post-2008 crash resulted in large drops for the cut-off points of the percentiles that make up the lowest ventile of Ireland’s income distribution.  The first chart compares Ireland’s position in the global income distribution at a time when the income of the lowest ventile was unusually low.

After 2014, there was very strong income growth for these percentiles with a doubling of the incomes shown in just five years.  It is possible that average income of the bottom 5 per cent in Ireland would be placed at around the 85th percentile in the current global income distribution.

The at-risk-of-poverty threshold at 60 per cent of the national median is currently around €15,000 for a single person (or €32,000 for a 2+2 family).  This income would be at around the 90th percentile of the global income distribution.

The interactive tool can be used to make find some unusual comparisons.  There is the example of South Africa where, in the 2011 data, the average income of the top five per cent was comparable to the income of the top 5 per cent in Ireland but where the bottom five cent were amongst some of the lowest incomes in the world.  Or Nigeria where the average income of the top five per cent is lower than the income of the bottom five per cent in Ireland.

Ireland South Africa Nigeria

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